Masters of Main Street

The financial-reform bill that Congress appears ready to pass is not the panacea for financial crises that some wanted. But, given the influential Wall Street lobbies that were trying to emasculate the law, it’s surprising that it turned out to be as tough as it is. The bill limits banks’ trading activities, brings transparency to the derivatives market, gives the government the power to take over troubled institutions, and creates a new consumer financial-protection agency. This means that it will have a real impact on the bottom lines of some of the country’s biggest firms, including powerhouses like Goldman Sachs and J. P. Morgan. Yet there was one group of businessmen that succeeded where Wall Street failed, beating back regulation and insuring that Congress would let them carry on with business as usual. These unexpected masters of Capitol Hill? The nation’s auto dealers.

The reform bill was potentially alarming for auto dealers because they’re major players in the consumer-credit business. There are close to eight hundred and fifty billion dollars’ worth of auto loans outstanding in the U.S.—about as much as our total credit-card debt—and car dealers broker about eighty per cent of them. Since the central task of the new consumer financial-protection agency is to oversee the market for consumer credit, which has become something of a cesspool in recent years, it would have been natural for car dealers to fall under its jurisdiction. Instead, the dealers won a special exemption: the agency can’t touch them.

The dealers argue that this is as it should be, since they are just middlemen between borrower and lender. The subprime crisis, though, taught us that middlemen can do enormous damage: mortgage brokers (the housing market’s middlemen) were among the key culprits, originating loans based on little or no documentation, encouraging borrowers to fudge their income, and brokering loans for more than borrowers could actually afford. Auto dealers aren’t that shady, but they’re no angels, either. As a recent study of the industry by Raj Date and Brian Reed shows, dealers routinely get incentive payments for steering customers toward particular lenders, and sometimes use the financing process to tack on additional fees. Some also mark up loans to a higher rate than the lender is charging and pocket the difference—a practice that, the Center for Responsible Lending estimates, cost car buyers more than twenty billion dollars in one year.

The auto dealers won their exemption the old-fashioned way, by lobbying the hell out of Congress. But the fact that they succeeded where bigger, more powerful companies didn’t reveals something important about the politics of influence on Capitol Hill: lobbying isn’t just about money. The companies that lobbied most successfully around the financial-reform bill didn’t necessarily pay the most. Instead, they were able to bring grassroots pressure to bear on individual congressmen and to present themselves as remote from Wall Street. The auto dealers were perfectly placed to make this pitch: there are some eighteen thousand auto dealerships around the country, employing close to a million people, which means that every congressman has lots of constituents whose livelihood depends on a dealership. Auto dealers have long been among the most powerful lobbies at the state level, and that influence helps in Washington, too. The dealers leveraged their power by defining themselves as clean-living Main Street businesses rather than plutocratic Wall Street ones. It seemed like every communiqué from the dealers’ association included the phrase “Main Street auto dealers.” This was a disingenuous argument—something like seventy per cent of auto loans are securitized or financed by Wall Street—but rhetorically effective. Auto dealers may collectively make up a huge industry, but most of them are small businessmen, just the kind of regular Americans that congressmen like to be seen as standing up for.

The dealers’ victory wasn’t an anomaly: associations of small businesses and producers are often surprisingly influential. A classic example is the wool-and-mohair subsidy, which was first put in place after the Second World War, to subsidize the production of material for soldiers’ uniforms. But the subsidy stayed in place long after its military purpose disappeared, because there were wool producers in nearly every state, and they all cared a lot about keeping the subsidy intact. Similarly, among the most vociferous opponents of tougher regulations in the financial-reform bill were small banks and credit unions (which will also be exempt from the new agency’s jurisdiction). This time around, at least, the fact that small and community banks opposed a provision may well have mattered more than what a behemoth like Citigroup thought.

One could say, of course, that this is just the way interest-group democracy is supposed to work—enabling little guys to band together into effective lobbies. The problem is that the system does nothing for the littlest guy of all—the consumer. In giving the dealers their exemption, Congress may have said that it was helping Main Street over Wall Street. But what it was actually doing was putting the dealers’ interest in no oversight ahead of the public’s interest in a fair marketplace. The result is a consumer financial-protection agency that’s prevented from overseeing one of the most common, and most important, financial products that consumers buy. It’s like creating the F.D.A. and then denying it authority over pain relievers. ♦

James Surowiecki is the author of “The Wisdom of Crowds” and writes about economics, business, and finance for the magazine.